Inequality rising in wake of crisis

‘There’s a lot of little kids going hungry round here,’ explained one friend, who works in a local community centre. Indeed, just the other day she had spoken to a family where the child had been chewing wallpaper at night. ‘He didn’t want to tell his mum because he knew she didn’t have the money for supper,’ she explained.”

That’s not from Dickens or George Orwell’s Down and Out in Paris or London, but from a recent column by Gillian Tett in the Financial Times. And she’s writing not about Lagos or Lahore, but Liverpool, a modern city in one of the world’s wealthiest countries.

Of course, the presence of poverty amid plenty – inequality – is not new. In reality, it’s hard to imagine any society functioning without some sort of wealth gap. But the past few decades have seen inequality rise in much of the world. That’s causing concern, and not just for reasons of social justice: A number of economists, most notably, perhaps, Joe Stiglitz, argue that excessive inequality undermines the foundations of growth by restricting the ability of poorer people to develop their human capital and by encouraging what economists call “rent seeking” – in essence, instead of creating a bigger economic pie, the well-off use their economic and political strength to take a bigger slice of the existing pie.

High levels of income inequality also seem to be linked to low levels of social mobility – in effect, it becomes more difficult for people to reach a position where they earn more than their parents did. Why? As Timothy Noah has memorably explained, “it’s harder to climb a ladder when the rungs are farther apart”. Alan Krueger, who chairs the panel of economists that advise President Obama, calls this phenomenon “The Great Gatsby Curve”. The fact that it’s getting attention at the highest levels of the U.S. government is indicative of growing concern over inequality.

Unfortunately, there’s no sign of it going away: New data from the OECD today show that the Great Recession has done nothing to narrow the gap between rich and poor – quite the opposite, in fact.

The numbers focus in part on what economists call “market income,” essentially the income households earn from work (as well as from investments), but excluding money they give to the state in tax and receive from it in the form of benefits. The data show that inequalities in market income in OECD countries rose by 1.4 percentage points between 2007 and 2010. That may not sound like much, but it’s equal to the increase seen in the previous 12 years.

Of course, for most families, market income is, at most, an abstract concept; what really matters for them is take-home income – in other words, the money they have after paying tax and receiving payments from the state. As taxes have tended to rise since the crisis struck, and as more people are now receiving payments like unemployment benefits, much of the increase in market income inequality has actually been cancelled out.

Does this mean it doesn’t matter? Not necessarily: Firstly, the data released today go up only to 2010. Since then, presumably, many long-term unemployed have seen a fall-off in their benefits, so reducing take-home income. As the OECD paper notes, “… these results only tell the beginning of the story”. Secondly, governments in many countries have moved to tighten spending in response to rising debt burdens. In her FT column, Gillian Tett touches directly on this point: “[T]ucked away behind (cheap) curtains on the estates, thousands of poor households are being quietly hammered by a myriad of subtle, hard-to-understand cuts.”

Her image of a hungry boy eating wallpaper also introduces another key aspect of the inequality story – namely, the impact on children and young people. As the OECD paper notes, poverty among children rose in 16 of the OECD’s 34 countries between 2007 and 2010 (although, it declined in the United Kingdom), while poverty among young people went up in 19. This links to a longer-term trend that has seen “youth and children replacing the elderly as the group at greater risk of income poverty across OECD countries,” as today’s paper notes.

Indeed, a recent Unicef report on child well-being showed that in eight OECD countries, more than 15% of children live in relative poverty. Some might argue that relative poverty shows only where someone stands in material terms in their own society, not an absolute sense of their ability to meet their needs. Nevertheless, as the Unicef authors note, the reality for children living in relative poverty is that they are “to some significant extent excluded from the advantages and opportunities which most children in that particular society would consider normal”.